Industry experts explain when it's time to consider an upgrade to an enterprise resource planning (ERP) system.
Small business accounting systems from Xero, MYOB, Reckon and so on are understandably popular. But as your business grows or changes, you might need to consider other options.
If you’re coming from a very small business that might mean upgrading to next package up – from MYOB Essentials to MYOB AccountRight, for example. Or you could consider an alternative accounting system – or expanding your existing system's capabilities with the growing number of add-ons available – as we have explained in our 2017 comparison of cloud accounting systems.
But if your business has become a lot bigger or more complex, you may need a more comprehensive change – to an ERP system.
What ERP can do
We've explained what ERP software is elsewhere, but essentially it can take care of a potentially broad range of business processes, including financials, manufacturing, inventory, service delivery, marketing and sales (including CRM – customer relationship management), logistics, and human resources (HR).
ERP's roots can be traced back half a century to MRP (material requirements planning) systems that were designed to handle production scheduling, inventory, and bill of materials (the components and raw materials needed to produce particular products).
Over time, more functions were added. Inventory has value and at least some of it will be bought in, so it makes sense to include accounting. Employees are needed to make products or deliver services, and they have to be paid and rostered so payroll and other HR functions can usefully be added, and so on. By the 1990s software with these features became known as ERP.
While the “enterprise” label may once have referred to the way only large companies could afford to run ERP, falling costs and particularly the arrival of SaaS (software as a service) have put it in reach of smaller businesses.
Signs that you may need to upgrade
But how do you know when it’s time to upgrade from a small business accounting system?
There are several signs. One is “a sense you're not getting the information you require out of the system,” said Sage Australia vice president Alan Osrin.
Examples include not being able to determine the actual cost of products, to track serial or batch numbers, or to handle multiple warehouses, offices or ledgers.
If you don't have sufficiently detailed information, you're flying blind, he said.
For instance, the simple bill of materials capability in low-end products is basically "recipe costing" according to Osrin, but that is not sufficient to give the true cost in a more complex business.
Job costing may need to take into account the cost of materials and of internal and external services, and so can get quite sophisticated – yet this is easy with an ERP system, according to MYOB general manager of industry solutions Andrew Birch.
IFS Australia and New Zealand managing director Rob Stummer added: “When you are looking to invest in a new software solution for core business operations such as managing complex projects or assets, consider whether it could also handle financials and other back-office functions in a single integrated package.”
Relying on spreadsheets is a bad sign
There is broad agreement that if you need to use multiple systems – especially if that involves spreadsheets to generate the reports you require, or relies on data being re-entered into separate systems – you should be looking at a more advanced system.
It's time for a change “if you find yourself spending most of your time in spreadsheets,” said Pronto managing director Chad Gates. As processes start to move outside the accounting software they become more time-consuming.
"An ERP consolidates information and removes barriers to growth," observed Stummer, adding that it can deliver information in real-time as processes occur.
Another sign is that the business now employs more people with narrower responsibilities. So some people such as senior managers may need broad access to accounting information, while others only need very limited access to do their jobs, suggests Birch.
A salesperson might only need to generate invoices and perhaps credit notes. Or you might want to let someone prepare purchase orders but not send them without your approval. Some small business products include this and other functionality mentioned in this article, but such internal controls are commonplace in systems designed for larger companies.
Diversifications and acquisitions
‘Verticalisation’ can be another issue. This might be a business that starts out importing and retailing goods then sets up a wholesale operation, or that adds a services unit to provide broader after-sales support – or a wholesaler that decides to enter the retail market and then discovers that its software doesn't have the required capability.
Businesses often start in a particular niche and then move into a wider area, said Gates. That can also involve having to work in multiple currencies.
And if such business changes are achieved by setting up or acquiring subsidiary companies, that presents a further level of complexity that may only be handled properly by more expensive software.
“When your organisation expands into a new line of business an ERP solution will allow you to maintain visibility and control of your operations and finances in one place across the whole business,” said Stummer.
Other aspects of complexity can be seen in inventory management, said Birch. Some items may be manufactured in-house (so you need to track components) while others are bought-in. Inventory may be held in different locations (perhaps involving different costs, according to Gates), and there may be different units of measure. For example, your supplier may sell a certain item by the box (such as boxes of 50 pieces) but you sell or use it by the piece.
Externally imposed changes such as legislation concerning product recalls, warranty management or consolidation and reporting can also be difficult to implement without switching to more capable software, said Gates.
Stummer pointed out that when your business is expanding and your existing software is becoming slow or difficult or costly to maintain with the increased demands being placed on it, the right ERP gives you the headroom needed for continued growth.
It generally makes sense use a single system that encompasses all aspects of running a business –CRM, warehousing and so on, in addition to financials – but Birch said there are some situations where it makes sense to combine it with one or two other products. Most ERP and other systems now provide application programming interfaces (APIs) that allow integration to cover special requirements. For example, MYOB's ERP systems can be combined with Salesforce.com to take advantage of the latter's sophisticated CRM facilities.
Sage has taken an interesting approach with its Sage Live product (coming to Australia this year), building it on the Salesforce.com platform to deliver what Osrin describes as the latest accounting technology with the top CRM system. The significance is that “CRM is the central truth for customer information,” allowing the various teams within your company to work together, he said.
While custom integrations (that is, those not directly provided and supported by the vendors of either product being connected) used to be challenging, most relevant software now includes robust and consistent APIs that ease the task of interfacing and sharing data. “That's really alleviated that problem,” said Birch.
Generic or industry-specific?
Whether or not mid-sized businesses are best served by software designed to suit their particular industry or by general-purpose systems is more contentious. Understandably, it seems to depend to some extent on what the vendor offers.
MYOB's EXO and Advanced cater for the requirements of mid-sized Australian businesses, perhaps with the inclusion of one or two add-ons, said Birch. “Our products are pretty broad and we have a range of add-on partners,” and because the company doesn't want its customers to be frustrated, “we actually approve our add-on partners.”
However, he conceded that certain niches – dentists, to name just one – may be better served by special-purpose software.
Infor vice president and managing director for South Asia, ANZ and ASEAN Helen Masters said: “Industry specific solutions are advantageous in that they leave no stone unturned and very explicitly address the challenges an industry is likely to face – challenges which may typically be overlooked by ‘one-size-fits-all’ solutions.
“For example, solutions for the food and beverage industry allow for total visibility, from the delivery of raw materials coming into the factory to the pallets of products going out the door.
“Dairy manufacturer Synlait Milk started as a small business based in Canterbury, New Zealand and is now considered one of the largest production sites in the world. For Synlait, it was after experiencing great growth that implementing industry-specific software became crucial.
“With business processes being particularly life-critical in the milk powder market, the company constantly needs to meet complex health and safety regulations, as well as track, measure and test ingredients during the product lifecycle. In the event of a recall, these solutions can also track and trace tools to help Synlait find the source and address the issue swiftly and effectively. With off-the-shelf solutions, this would present a timely and costly experience.”
Don't put off a decision too long
Small business owners sometimes “hang on like grim death [to their original software] as long as they possibly can,” said Birch, observing that “some people run pretty big companies ... on [MYOB] AccountRight or Essentials.”
The problems they experience are usually not catastrophic, just inconvenient or inefficient. It often takes a serious situation such as an acquisition, merger, audit problem or a failure to manage inventory to trigger change, even though earlier adoption of an ERP system would make the company run more efficiently.
Part of this issue is that the profitability of a business can hide the cost of inefficiencies, observed Gates. A business that's struggling tends to look for ways of reducing costs, but when things are going well you need to consciously ask how operations could be improved.
An ERP system that supports new technology can accelerate innovation while maintaining control when you survive in a competitive market, said Stummer.
Processes may need to change
When you do change your software, your business processes will need to change as well, said Birch – after all, it's the shortcomings of the existing processes that are likely to be the reason for changing.
Indeed, an ERP system can help standardise, measure and improve processes, according to Stummer.
So it's a good idea to find skilled help – including change management expertise – to assist with the transition. MYOB's partners are able to provide that assistance, according to Birch.
It's up to the customer how quickly they want to change over to the new software, and it's not necessary to simultaneously change all parts of the business.
But plenty of preparation is needed, including analysing the business and its workflows, and such projects typically take about three months, Birch said.
Upgrading from entry-level small business accounting software to more capable products or even full-blown ERP system is not to be taken lightly, but if done the right way and for the right reasons can provide a firm foundation for your business's future.